Portfolio theory for the recourse certainty equivalent maximizing investor

Aharon Ben-Tal, Marc Teboulle

Research output: Contribution to journalArticlepeer-review

Abstract

The portfolio selection problem with one safe and n risky assets is analyzed via a new decision theoretic criterion based on the Recourse Certainty Equivalent (RCE). Fundamental results in portfolio theory, previously studied under the Expected Utility criterion (EU), such as separation theorems, comparative static analysis, and threshold values for inclusion or exclusion of risky assets in the optimal portfolio, are obtained here. In contrast to the EU model, our results for the RCE maximizing investor do not impose restrictions on either the utility function or the underlying probability laws. We also derive a dual portfolio selection problem and provide it with a concrete economic interpretation.

Original languageEnglish
Pages (from-to)479-499
Number of pages21
JournalAnnals of Operations Research
Volume31
Issue number1
DOIs
StatePublished - Dec 1991
Externally publishedYes

Keywords

  • Portfolio selection
  • duality in convex programming
  • expected utility
  • recourse certainty equivalent
  • risk aversion

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